Retail: fine margins

In this publication, FRP Advisory Restructuring Advisory Partners, Ian Corfield and Phil Armstrong explore the headwinds the leisure sector is facing, and the key factors that leisure businesses will need to keep in mind as they re open their doors.

Retail: fine margins Analysing the challenges and opportunities that will shape the sector

Against such a dynamic backdrop and strong

headwinds, the retail sector has been working hard to adapt – demonstrating once again its resilience, ingenuity

and flexibility. Alastair Massey Restructuring Advisory To better understand the outlook of the industry, we spoke to 250 senior decision makers working in retail businesses ranging from fashion, home and DIY, to grocery and electricals. While the economic picture continues to change, they paint a picture of an industry in flux.



Retail: fine margins

Turbulent times

These are incredibly turbulent times for retailers. Rising inflation is pushing up operating costs and dampening consumer-spend. A looming recession – shallow or otherwise – is set to keep consumer confidence depressed for some time to come. However, against such a dynamic backdrop and strong headwinds, the retail sector has been working hard to adapt – demonstrating once again its resilience, ingenuity and flexibility. With conditions set to remain challenging, we commissioned this report to pinpoint where the sector’s likely biggest pressures lie in the months ahead – and, crucially, what steps businesses are planning to take in response. We spoke to 250 senior retail decision makers at companies with 100 or more employees on everything from their margin pressures, to how they plan to improve their cash position and tackle specific issues – such as a ‘returns tsunami’. The findings highlight just how the sector is adapting, and provide some food for thought as retailers consider their strategies for resilience and growth through 2023 and beyond. We hope you find them useful.

Getting in touch

Alastair Massey Partner Restructuring Advisory London +44 (0)20 3005 4279

Phil Reynolds Partner Restructuring Advisory London +44 (0)20 3005 4270


Retail: fine margins

The state of play

Protecting headroom

Given the extraordinary pressures facing retailers, how are firms’ margins and cash positions holding up, and what steps have they taken to improve their position so far? Our data indicates that firms are taking bold and robust action to protect their margins. This is vital at a time when two thirds (66%) of retailers tell us that their operating costs have increased over the past six months. It’s no great surprise to learn that the biggest margin pressures from a cost perspective during the last six months have been energy (60%), wholesale costs (40%), labour (35%), shipping costs (35%), warehousing costs (22%) and foreign exchange (22%). They have also seen margins eroded by consumer demand (26%). Fewer than one in five (18%) cited product discounting as a principal cause of margin pressure, indicating that most have managed to find ways to reduce their input costs to avoid passing price increases on to customers. As a result, nearly half (45%) of the retailers we spoke to have managed to grow margins over the past six months, whilst only a fifth (22%) have seen margins fall.

But what do these margin positions mean in practice? If they’ve grown – is this enough to support brands’ future ambitions, or will it leave them just getting by? Positively, just one in ten (11%) say their margins are currently unsustainable and pose a substantial risk to their survival. A further half (47%) say their margins are currently sustainable, and will continue to enable them to grow. However, two in five (42%) say that, though their margins are currently sustainable, they don’t leave any room to invest for further growth. This highlights the risk that many firms will potentially be unable to protect or improve their market position, weather future market downturns or make the investments they need to drive down costs.

Have your margins increased or decreased, on average, over the past six months?

33% Unchanged

22% Decreased

45% Increased


Retail: fine margins

Cutting costs

Firms have also looked to make savings on their wage bills, with a sixth (17%) having permanently reduced their headcount and a similar number (16%) moving to change employment contracts and/or staff working hours. While 14% have negotiated revised terms for the repayment of debts, just over a fifth (21%) have taken on more debt during the period. Though this will have been strategically important in many cases, it may pose future financial hurdles to overcome if the cost of serving debt rises as interest rates are reviewed to tame inflation. Most analysts agree that the Bank of England will raise interest rates again to 4.5% in the spring of 2023 before a series of cuts through 2024 brings the rate back to 3.5%. Some retailers are also choosing to defer their VAT and tax obligations (14%) and, in some cases, not paying pension contributions (12%). These choices could also have knock-on effects. The Pensions Regulator has the power to impose a fine if the right pension contributions aren’t paid on time, for example. 60% 60% of retailers say energy costs have had the biggest impact on profits.

So, how are retailers protecting their margins and improving their cash position? The most popular action, cited by more than a third (36%) of respondents, has been to put up prices for customers. Some businesses will have been passing through the cost increases they’ve faced themselves. But others may have also taken the opportunity to boost their margins even more. However, price increases won’t have been an option for all – or may have run out of traction – so retailers have also taken a range of steps, including interrogating supply chains, streamlining operations and enacting organisational change. In the last six months, a quarter (26%) have changed their commercial energy supplier, while the same proportion have also changed product suppliers, and just over a fifth (22%) have extended terms with their existing ones. Elsewhere, brands have looked to their property portfolios for savings. Just over a fifth (21%) have re-negotiated rental agreements while a sixth (16%) have closed physical stores and one in ten (9%) have closed offices.

Thinking about the past six months, what have been your biggest margin pressures, if any?







Energy costs Wholesale costs Labour costs Shipping costs Weaker demand Warehousing costs Product discounting Foreign exchange

*Results based on responses from 250 senior decision makers from retail businesses, who each selected all steps that applied to their business.


Steven Cook Former CEO of Debenhams

“This is certainly the most volatile market I have experienced in my career to date. “While some businesses at the upper end of the market are continuing to show a steady increase in sales, there remains a great deal of pressure on mid-sized businesses and the smaller end of the market. “The impact of inflation has significantly increased the price of food and packaged goods, while imported apparel and footwear have been less affected, for example.

“Alongside this, return rates are skyrocketing for digital businesses, fuelled by the growth in online shopping, and more consumers choosing to return goods shortly after purchase. “It’s fair to assume that consumers will seek bargain deals and offers this year, but retailers are already incredibly promotion-focused and they can only go so far. “They need to stay nimble and respond quickly to changes in the market. This includes being light on inventory to avoid becoming stuck with too much stock.

Ultimately, if a retailer is performing reasonably well during this challenging period, their resilience is likely to attract investor attention. Demand will inevitably return, and the investment landscape will evolve to match. “Conversely, a lot of retailers have left the market, so there are more sales going into fewer players than there were a few years ago. “This helps existing retailers as it reduces overcapacity in the market, and concentrates consumer spend. Whether this is enough to give the ones that remain an uplift though, remains to be seen.”


Retail: fine margins

Looking ahead

A helping hand

What do retailers anticipate in the months ahead? Many of the issues that caused problems for the sector in 2022 are still in play as central banks work to get inflation under control and the war in Ukraine continues to impact global energy supplies. Accordingly, when we asked retailers to consider what they thought would be the biggest margin pressures in the next six months, half (52%) flagged the impact of energy costs. The government has already announced that it will scale back support for businesses from April this year, when the current energy price cap is replaced by a new year- long scheme offering a discount on wholesale prices. It represents a significant withdrawal of support for businesses. While the current six-month scheme was funded to the tune of £18.4 billion, its 12-month long replacement has been capped at £5.5 billon. But when we asked respondents how confident they were of continuing to trade through the next year with the reduced level of government energy support, three quarters (76%) said they were confident that they could. Still, that leaves more than a fifth (22%) of firms who worry that energy prices will be an existential threat to their business.

It’s not a surprise then that when asked what they would most like the government to do to help strengthen their trading position, retailers most commonly cited greater support with energy bills (33%). Also on their wish list was reducing VAT (21%), cutting red tape when hiring overseas workers (17%), greater rates relief (15%) and streamline import processes (11%). That tallies with the biggest margin pressures identified by retailers for the next six months, which are strikingly similar to those seen during 2022. They are led by energy costs (52%), followed by wholesale costs (30%), shipping costs (30%), labour costs (29%), warehousing costs (27%), weaker customer demand (26%), increase in property rental costs (24%), foreign exchange costs (16%) and product discounting (15%). In addition to these, over seven in ten brands (72%) are expecting to see an increase in creditor pressure in the next year – with just over a fifth (21%) expecting this to be extreme.


Retail: fine margins

Making changes

Top five actions to improve cash position in the next six months

Encouragingly, brands have plans in place to address these hurdles and improve or grow their cash position. A third (32%) plan more price rises for customers and distributors. However, this will be tight rope to walk – there is only so much that some customers will pay for certain goods, and so far that household budgets will realistically stretch during a cost-of-living crisis. A trend that we’ve observed is customers prioritising perceived or actual value for money in their purchasing decisions. Many are willing to pay more if it means getting more in return. Where brands can’t add this in terms of the physical quality of the products being sold, brands may have success by adding value to their product in new ways – for example, combining a clothing range with a virtual styling service. This can help justify price increases and even contribute to a product’s competitiveness in the long-term. Elsewhere, a fifth (20%) of retailers will look to extend suppliers’ payment terms, whilst almost a quarter (23%) will look to change suppliers. Switching suppliers won’t just be a decision taken on price – in clothing retail, for example, we’ve seen a clear trend in brands onshoring and nearshoring suppliers to improve their supply chain’s resilience, and to help become more responsive to changes in the market. When it comes to contract negotiations, it is essential that retailers have a clear understanding of suppliers’ terms – which can be complex and take a variety of different formats – and that they strike a deal that meets the needs of both parties. A healthy supplier base is key as a failure of a key supplier can be costly. No retailer wants empty space. In terms of supplier relationships, there are a limited number of situations where it may actually be beneficial for businesses to absorb short-term costs in exchange for better future terms or conditions. For example, when agreeing to a price rise with a new supplier, brands could make it contingent on receiving privileged service levels going forward. Notably, a further fifth (20%) plan to turn to their landlords to re-negotiate rental agreements – something we’ll explore in detail later in this report. One in six (15%) will look to permanently reduce headcount, while almost as many (14%) will look to change staff contracts or working hours. Just over one in ten (13%) will stop contributing to pension funds. Only 17% plan to change their commercial energy supplier in the future, suggesting most who were planning to do so already have. Meanwhile, just under a fifth will be taking on new debt (18%), revising the terms of debt repayments (15%) and deferring VAT or tax obligations (13%), and two thirds (68%) plan to approach shareholders and/or lenders for more financial support in the next six months.


Increase prices for customers/distributors


Change product suppliers


Extend terms with product suppliers


Re-negotiate/change rental agreements


Take on new debt

*Results based on responses from 250 senior decision makers from retail businesses, who each selected all steps that applied to their business.

Rents and returns

For the final section of this research, we sought to shine a light on two current big issues in retail: rents and returns. Both these factors are strategic focuses for retailers as they represent significant cost challenges, and are symptomatic of tectonic shifts in the retail landscape and customers’ buying habits.


Retail: fine margins

Rent relief

Return to sender

Not a week goes by where a new headline doesn’t question what’s next for the ‘high street’. In an increasingly digital retail landscape – and faced with soaring costs in areas like energy – many brands have taken steps to consolidate or adapt their bricks and mortar presence. Last year, nearly 50 stores closed every day 1 . There will be more consolidation of physical premises – including retailers’ offices – ahead. From our research, one in six of the brands we spoke to plan to close stores or offices (both 15%) in the next six months. But the high street hasn’t been entirely cut from retailers’ plans. For many brands, the focus will be on ensuring that their bricks and mortar estate is aligned with their long-term strategy, and as cost-effective as possible. Managing rents will be a critical part of this. Just over a fifth (21%) of retailers we spoke to told us they had already renegotiated rents with landlords in a move to improve their cash position, while almost the same proportion (20%) plan to do the same in the next six months. Half (49%) want to switch some or all agreements to fixed rents, while a similar number (47%) favour turnover-based rents – highlighting divergence in the market. A third (33%) will be asking landlords to agree to a rental holiday or defer rental payments. On the ground, we’re seeing some tenants resist turnover- based rents as they seek to protect detailed financial information as well as avoid it costing them more in the long run. There’s also an administrative burden that landlords would rather avoid. Indeed, many landlords will have bundled their portfolio and used it as a securitised loan package, for example, where they have a set yield to pay. Having a fixed income is therefore more attractive to them than a variable one. While we can see the appeal of turnover rents, it’s for these reasons that we’d expect straight discounts to be a more common outcome in rent negotiations during 2023. For any retailer looking to negotiate rents, there are some essential principles to keep in mind. When it comes to negotiation, being open and transparent is key. Tenants’ requests for concessions need to be realistic, grounded in facts and not threaten the landlord’s solvency. It is important for tenants to give landlords options where possible. Offering a menu of acceptable potential solutions such as downsizing or extended leases rather than trying to second-guess the landlords’ intentions is fertile ground for sustainable compromises. Having a robust cashflow forecast and detailed analysis of financials is also key. If a brand is needing to reduce rents due to financial distress, these evidence why concessions should be made by the landlord. If a new deal is being negotiated, they demonstrate that a brand can meet its commitments. We expect to see the use of Restructuring Plans in the retail space as a super-charged alternative to the well-used Company Voluntary Arrangement as retailers seek to reshape their store portfolios quickly and with more certainty.

Alongside the rise in e-commerce has come a ‘tsunami’ of returns. More than half (56%) of the retailers we surveyed said they had seen an increase in customer return volumes over the past six months. While free returns are incredibly popular with consumers, in some cases this is a service that many brands can no longer support. Shipping and processing returned items is a hugely costly process – estimated to run up a bill to the tune of £7 billion every year 2 . Around four in five (79%) of the retailers we surveyed are planning to change their approach to product returns in the next six months as brands act to try to manage and recoup this cost. How? Close to half (45%) plan to introduce customer fees for returns for the first time, or for the first time on certain products, while more than a third (36%) will hike existing fees. One in six (15%) are going to change their policy so that returns can only be made in store. The fact that we’ve seen some of the bigger players in retail withdraw or change their free returns policies has certainly made it easier for others to follow in their wake. The cost of returns has been a bugbear for retailers for some time, but no one wanted to move first as consumers were so wedded to the concept. However, it will still be a decision that brands need to consider carefully. It is still enough of a competitive advantage that some will continue to make free returns a central part of their offering for some time to come. Where relevant, brands should consider where they can direct customers into stores to make returns. This increases in- store footfall, and simultaneously unlocks cross-selling and up-selling opportunities.

Have you seen an increase in customer return volumes over the last six months? 9

Steven Cook - Former CEO of Debenhams

“On the other hand, some omnichannel stores have the upper hand. Some retailers charge a fee to return an item online but offer free returns if the consumer brings the item into store. Encouraging consumers into store to return goods in this way drives footfall and gives the consumer the opportunity to exchange the purchase, rather than just return it.”

“Many retailers are struggling with high return rates and it’s particularly hard to run a digital business from a returns perspective. For example, one leading ecommerce brand currently has a 72 per cent return rate, which is difficult to manage.

What’s next?

The coming months won’t be without their challenges. But we’re confident the sector will continue to identify and capitalise on the opportunities among them. We hope this report has shone a light on some of these hurdles, and retailers’ strategies in response. We’re here to help – if you have any questions, please get in touch.

The financial pressures on consumers look set to continue through the year ahead, but it’s reassuring to hear most retailers say that margins are holding up and that they expect to weather this storm. 85% Overall, almost nine in ten (85%) of those we surveyed said they were confident of trading through the next six months. However, the only thing you can say for certain about a forecast is that it is not going to be absolutely correct. The key is to have a plan that is flexible and responsive, with multi-layered contingencies, so that retailers can move quickly to respond to further changes in the environment – both positive and adverse. Keeping a close eye on the fundamentals – ensuring cash flow forecasts are up-to-date, and tightly managing working capital – will be critical. This responsiveness must extend to seeking early support and advice should cracks appear. With time on your side, there is always a greater chance of finding a sustainable path forward, whether that’s adapting strategy, or pursuing formal recovery or restructuring options.

Getting in touch

Alastair Massey Partner Restructuring Advisory London +44 (0)20 3005 4279

Phil Reynolds Partner Restructuring Advisory London +44 (0)20 3005 4270

Notes 1 2


The only thing you can say for certain about a forecast is that it is not going to be absolutely correct. The key is to have a plan that is flexible and responsive, with multi-layered contingencies, so that retailers can move quickly to respond to further changes. Phil Reynolds Restructuring Advisory


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February 2023

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